Agefi Luxembourg - octobre 2024
AGEFI Luxembourg 38 Octobre 2024 Droit / Emploi By Emilien LEBAS, Partner, International Tax, Tax controversy & dispute resolution leader & Valentine PLATEAU, Manager, International Tax, KPMG Luxembourg O n 17 July 2024, the Luxem- bourg administrative court of appeal (theAdministrative Court) (Cour administrative, 17 juillet 2024, n°50199C) issued a de- cision inwhich it took po- sition onwhether, and under which circumstances, convertible bonds could be valued at fair market value (FMV) for the computation of unitary value based on §14 of the Valuation Law ( Bewer- tungsgesetz – “BewG”). Case summary In the case under review, on 1 February 2019 the Luxembourg tax authorities challenged the uni- tary values, and consequently the corresponding net wealth tax charges, computed by the taxpayer in its 2016 and 2017 net wealth tax returns. In par- ticular, the tax office considered that the partici- pation held by the taxpayer in its subsidiary should be valued at FMV rather than book value. The former being higher than the latter, this au- tomatically led to an increase of the unitary value of the taxpayer, and of its net wealth tax liability. A particular feature in this case was that the ap- pellant had issued convertible bonds (to finance its participation) which could, as per the terms and conditions ( T&C ) of the agreement, be ei- ther: 1. converted into shares in the taxpayer; 2. repurchased for a price corresponding to the nominal value of the convertible bonds or alter- natively, upon the taxpayer’s decision, to the FMV of the taxpayer’s shares; 3. sold to a third party at FMV. The appellant submitted its observations on 15 March 2019. Although it did not object to the tax office’s position per se , it however maintained that since the shares it held were to be valued at FMV, its convertible bonds should be valued at FMV as well. In short, the taxpayer attempted to explain that the FMV of the convertible bonds would have increased in the same proportion as the value of the shares it held in its subsidiary, and therefore it would be reasonable that the value of the bonds to be taken into account in the computa- tion of its unitary value should correspond to the FMV of its own shares. To support its position, the taxpayer argued that, as per the T&C set forth in the issuance agree- ment, the convertible bonds could at any time ei- ther be converted into shares, repurchased, or sold to a third party, each event being carried out at FMV. Consequently, the T&C of the agreement should constitute a specific circumstance inherent to the financial instrument in question, justifying the use of the FMV of its shares for the purposes of valuing the convertible bonds for net wealth tax purposes. On 25April 2019, the final tax assessments for net wealth tax 2016 and 2017 were issued by the tax office. Such tax assessment did not however fol- low the taxpayer’s position and consequently the latter addressed an administrative claim to the Di- rector of the Luxembourg direct tax authorities in July 2019. As the latter remained silent, the tax- payer ultimately referred the case to the Luxem- bourg administrative court of first instance ( the Administrative Tribunal ) in October 2021. The Administrative Tribunal rejected the tax- payer’s argumentation, hence confirming the po- sition of the tax office and the rectified tax assessment issued (1) . This ultimately led the claimant to lodge an appeal with theAdministra- tive Court in March 2024. The Administrative Court’s decision In the case at stake, the Administrative Court overall agreedwith theAdministrative Tribunal’s approach, and thus the outcome ultimately re- mains unchanged for the taxpayer. TheAdministrative Court started its reasoning by reiterating the method to value debts. It con- firmed that the approach to follow should remain the same irrespective of the type of the debt, and therefore that this approach should apply to convertible bonds as well (the latter simply having the ad- ditional feature of allowing the holder to become a shareholder of the issuing company under the terms and conditions set forth in the agreement). As there are no specific provi- sions regarding the valuation method of convertible bonds, the Adminis- trative Court, aligned with the Administra- tive Tribunal, referred to the general principle governing the valuation of debts, namely §14 BewG: “ Capital receivables not mentioned in §13, and debts, must be valued at their nominal value, unless specific circumstances justify a higher or lower value. (...)” (2) . In other words, ac- cording to this provision, the valuation at nominal value is the standard principle while valuation at FMV is the exception. Slightly diverging from the position taken by the Administrative Tribunal which referred to excep- tional circumstances ( circonstances exceptionnelles ), the Administrative Court instead adhered to the original criterion set forth in the law, which pro- vides that debt should be valued at nominal value unless the taxpayer is able to evidence specific cir- cumstances (“ circonstances particulières ”, as op- posed to exceptional) justifying diverging from the general valuation treatment of debt. The administrative judge therefore undertook a factual analysis by delving into the agreement and observed that it includes several options that parties are at liberty to take or not. In the present case, the judge noted that the conversion was not the sole option as per the T&C of the agreement. For instance, the taxpayer could have elected to redeem the convertible bonds at their nominal value instead of converting them in case the FMV of the convertible bonds were higher than their nominal value. Furthermore, no intention to convert the convert- ible bonds into shares had been expressed, nor had any conversion occurred as of 1 January of each relevant year (which, as recalled by the Ad- ministrative Court, should be the relevant date to assess the unitary value of a given tax year). On this basis, the administrative judge rejected the taxpayer’s attempt to determine its unitary values as of 1 January 2016 and 2017 based on a hypo- thetical situation (the conversion of the bonds, which did not actually occur). Consequently, the Administrative Court (like the Administrative Tribunal), did not detect the existence of any spe- cific circumstances that would justify an evalua- tion at FMV in deviation from §14 of the BewG. In addition, the Administrative Court (and ini- tially the Administrative Tribunal) rejected the appellant’s argument referring to another piece of case law from the Administrative Tribunal (3) and asserted that it could be transposed given that the situation at the time was fundamentally different from that in the present case, as the aim was to assess the wealth of the bond holder and not of the bond issuer. This analysis could high- light the fact that the FMV of an instrument can be different depending on whether the assess- ment occurs from the lender’s or the borrower’s point of view. As a result, the Administrative Court confirmed the decision rendered by the Administrative Tri- bunal, denying the valuation of the convertible bonds at FMV. Takeaways Although the decision of the Administrative Court does not differ significantly from the posi- tion taken by theAdministrative Tribunal, as dis- cussed above, the case remains interesting as it deals with the highly technical topic of debt val- uation and dispels some uncertainty around it. TheAdministrative Court confirmed the reason- ing that is to be consistently followed with re- spect to debt valuation for net wealth tax purposes, and clarified the criteria that may allow, on a case-by-case basis, taxpayers to di- verge from the general rule requiring debts to be valued at nominal value. In that regard, the position held by the Adminis- trative Court provides some good news for tax- payers (although not somuch for the claimant) as it decided not to go beyond the legislator’s inten- tion and reaffirmed the necessity to demonstrate specific circumstances justifying relying on debts’ FMV, in line with the wording of the law. It thus effectively contradicted the more restric- tive test (i.e., the existence of exceptional circum- stances ) retained by theAdministrative Tribunal, leaving more room for the taxpayer to actually meet the requirement. The case in question illustrates well why the ex- ception provided by §14 BweG is attractive to tax- payers. However, taxpayers must be cautious before valuing the debts at anything other than the nominal value for net wealth tax purposes. 1)Tribunaladministratif,2février2024,N°46542. 2)UnofficialEnglishtranslation.OriginaltextinGerman:« (1)Ka- pitalforderungen, die nicht im § 13 bezeichnet sind, und Schulden sind mit demNennwert anzusetzen, wenn nicht besondereUmstände einen höherenodergeringerenWertbegründen.(…)» 3)Tribunaladministratif,15mars2000,N°11226. Tax controversy series Administrative court of appeal decision on convertible bonds valuation for net wealth tax purposes L emardi 24 septembre, DLA Piper a eu l'honneur d'ac- cueillir près de 200 invités demarque pour célébrer le succès de son équipe luxembourgeoise, l'inauguration officielle de ses nouveaux bureaux et marquer le dixième anniversaire du cabinet dans le pays. L'événement a réuni un public prestigieux de clients, d'acteurs clés de la communauté financière et des affaires de Luxembourg, ainsi que d'invités internationaux, reflétant l'impor- tance du réseau du cabinet et sa portéemondiale. La soirée fut le témoin de l'engagement de DLA Piper envers l'excellence et de sa vision stratégique pour l'avenir. Dans leurs discours, Catherine Pogorzelski, associée senior et fondatrice de DLA Piper à Luxembourg, et Xavier Guzman, Country Managing Partner, ont souligné leparcours remarquabledu cabinet dans le pays. Simon Levine, Managing Partner de DLA Piper et Global co-CEO, et Jon Hayes, Senior Partner etGlobal co-Chair, lesont rejoints sur scène pour évoquer l'importance de la présence de DLA Piper au Luxem- bourg en tant qu'un des plus importants cabinets d'avocats aumonde. Ce qui a débuté comme une folle ambi- tiondetroispersonnesen2014s'esttrans- formé en success story regroupant aujourd'hui plus de 100 professionnels. Le déménagement du bureau vers ses nouveaux locaux situés Placede l’Étoile a marqué une étape importante, symboli- santàlafoisl'engagementlocalducabinet et son envergure internationale. «Nos nouveaux bureaux ne sont pas simplement un lieu de travail. Ils sont le reflet dequi nous sommes et cequenous aspirons à devenir», a déclaré Catherine Pogorzelski. «L'architecture capture notre ancrage local et incarne l'innova- tion, la durabilité et la résilience, des valeurs qui reflètent l'esprit visionnaire même du Luxembourg.» «En emménageant dans ces nouveaux bureaux au cœur de la ville, nous témoi- gnonsdelasoliditédenotrebasedeclients etdenotreconfiancedanslemarché,mais également denotre engagement envers le Luxembourg et nos équipes, qui contri- buent à fairedeDLAPiper le cabinet qu'il est», a commenté SimonLevine. Xavier Guzman, qui a pris la tête du bureau plus tôt cette année, a parlé avec passion de l'avenir du cabinet et de ses ambitions. «Nous continuerons à croître, ànousdévelopperetàcontribueraudéve- loppement du marché luxembourgeois, guidés par des valeurs fortes, avec la qua- lité, la diversité et l'innovation au cœur de tout ce que nous faisons. Dans unmonde deplusenpluscomplexeetenperpétuelle évolution, nous nous engageons à être à l'écoutedenosclientsetdenotrecommu- nauté,àrépondreauxbesoinsdeleurssec- teurs d'activité et à rester à la pointe du marché juridique.» Lacélébrationaégalementmisenlumière le rôle de DLA Piper dans l'écosystème financierlocal,notammentdanslesecteur de la gestion d'actifs et des fonds d'inves- tissement. Catherine, aujourd'hui Global Co-ChairfortheInvestmentManagement & Funds sector au sein de DLA Piper a ajouté «Les fonds sont lemoteur qui pro- pulse Luxembourg vers l'avenir, et nous voulons être le carburant qui alimente cettecroissance.Encombinantnotreéner- gie avec celle de nos collègues dans le monde entier, nous soutiendrons ledéve- loppement du secteur». JonHayes a poursuivi : «Le Luxembourg est un marché véritablement fascinant, jouant un rôle stratégique clé au cœur de nombreuses affaires complexes et trans- frontalières. Ce qui distingue DLA Piper ici,c'estnotrecapacitéàconnecterlespays, les groupes de pratique et les secteurs, à travaillerdemanière fluide, alignéeet col- laborative au-delà des frontières.» Alors que le bureau de DLA Piper à Luxembourgentamesaprochainedécen- nie,lecabinetestprêtàpoursuivresacrois- sance. «Ensemble, nous avons construit des fondations solides, et ensemble, nous façonnerons l'avenir», a conclu Xavier. «Ensemble, réalisons nos ambitions !» DLAPiper célèbre une décennie de succès au Luxembourg ©DLAPiper
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